The Upcoming Inflation Data Might Bolster Bear-Market Rally, JPMorgan Says

Thursday's widely watched US inflation data are likely to come in cooler than expected, helping stocks extend a bear-market rally, according to JPMorgan.

While economists expect December's consumer price index to slide to a 6.5% annualized pace, Andrew Tyler, an analyst from JPMorgan's sales and trading team, sees a 65% probability that the actual reading would come in between 6.4% to 6.6%. Since investors are largely defensively positioned, that would spark a rush to unwind bearish positions, which could lead to a 1.5% to 2% rise for the S&P 500 over the session.

"This should aid the nascent bear rally, but we remain cautious as long as the Fed remains active with its tightening cycle," Tyler wrote in a note to clients Tuesday. "Our scenario analysis is skewed bullishly based upon positioning that could cause an overreaction via short-covering on a dovish print."

CPI days have become a source of market volatility in the past year as the Fed embarked on the most aggressive tightening in decades to tame runaway inflation. The S&P 500 swung an average of 1.9% on the day that CPI data was released last year.